Chapter 6 Conffic s Be ween Personal Interests and Duty Company Directors have great power in companies.

This makes companies very vulnerable to boardroom mischief. Accordingly, the law demands high standards of fidelity and honesty from directors. They must not let their personal interests interfere or compete with their duties to their company. Because they are fiduciary agents of their companies, they may not (either themselves or on behalf of the companies), without appropriate disclosure, enter into contracts in which they have a personal interest that conflicts with, or may possibly conflict with, the interests of their companies. They also may not make what are termed Jsecret profits that is, profits gained directly or indirectly through the office of director without the knowledge and sanction of the members. Covert deals are unacceptable. Directors breach this duty when, for example, they accept bribes, use the companys assets or secrets to compete with the company, or usurp or appropriate to their own use business opportunities which properly belong to the company. Let us consider aspects of this broad duty.

Contracts between directors and the company

As fiduciaries, directors must not use their power to deal with themselves for their own advantage. Self-dealing can occur where a director enters a contract with his own company (for example, to sell something to the company). The potential for abuse of power is clear and the law is firmly against such practices. In Nor~t~West~Transportation Co Ltd v Beatty, Sir Richard Baggallay set down the basic principle: . . a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect ....

The director has a duty to use his knowledge and skill for the benefit of his company when he is involved in company affairs. He must seek the best bargain when negotiating contracts for the company. The company cannot be guaranteed his best efforts when he has a conflicting interest.

In Beatty a steamer was being built for Beatty, who was both a major shareholder and a director of the North-West Transportation Company.

The board resolved to buy the steamer from Beatty. The contract to buy, being in breach of fiduciary duty, would have been voidable. However, the resolution to buy had been adopted by a majority of votes at a general meeting, which validated the breach. A company can normally avoid such contracts, and recover any profits made by offending directors, where contracts are made by the company with any of its directors, or with some other person or entity in whom the director is interested. What amounts to an interest in a contract in this context? The Engl ish Court of Appeal, in Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co, suggested that holding a very small interest as shareholder of a company, that is contracting with the directors company, is enough.4 Todd v Robinsons was cited as authority.

A merely nominal benefit accruing to him as a shareholder was enough to make an official on a board interested in a contract which the company (in which he held those shares) entered with the board. In Aberdeen Railway,6 the chairman of the board entered into a contract on behalf of the company to buy a large number of chairs from a firm in which he was interested as a partner. The Lord Chancellor was succinct:

His duty to the company imposed on him the obligation of obtaining these iron chairs at the lowest possible price. His personal interest would lead him in an entirely opposite direction -would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed ....

The duty to disclose at common law Under common law, a director has a duty to disclose to the shareholders in general meeting the nature of any direct or indirect personal interest he has in contracts to which the company is or

will be a party. Disclosure to the directors only is not enough. Gowers assessment is compelling: It hardly seems overcynical to suggest that disclosure to ones cronies is a less effective restraint on self-seeking then disclosure to those for whom one is a fiduciary. The boards sanction is insufficient, even if the interested director does not attend or vote at the board meeting purporting to sanction the breach of duty. The law acknowledges the obvious danger that reciprocal selfinterest or misplaced loyalty will affect fellow directors business judgment and blunt their zeal to get the best deal for the company. The prohibition against being or placing oneself in a situation where ones interest may conflict with duty is strictly applied. But the company to whom the duty is owed may choose to adopt the contract and remedy or forgive the breach. To circumvent the common law disclosure requirement, articles of association may be drafted to permit directors to be interested in contracts with the company, to allow them to be present at board meetings, and even to vote when contracts in which they are interested are at issue. One such article was upheld in Peninsular and Oriental Steam Navigation Co v Johnson.1 It said: . . . no director shall be disqualified by his office from entering into any contract or arrangement with the company either as vendor, purchaser, broker, banker, solicitor, commission agent or otherwise, but no such director shall vote in respect of any such contract or arrangement in which he is so interested as aforesaid, or if he does his vote shall not be counted. Such articles are now in common use. The courts take the view that they should stand because the company can benefit from the advice of someone who, although he may be interested on the other side of the fence, does bring to bear the benefit of his experience in other businesses.

The Regal (Hastings)-Boardman "rule"Subsequent decisions have reinforced a strict view of the line taken inRegal (Hastings). Lord Upjohn, in Boardman v Phipps~affirmed that there is a breach of conflict if there is a mere possibility of conflict between the fiduciarys own interests and those he is bound to protect. The phrase possibly may conflict requires consideration. In my viewit means that the reasonable man looking at the relevant facts andcircumstances of the

particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict23 [emphasis added]. In Boardman v Phipps, two trustees (in a fiduciary position equivalent to the position of directors to a company) had acquired shares in a private company in their own names. They sought a controlling interest in an effort to improve the value of the trusts existing holdings in the same company. The House of Lords ruled 3:2 that they had to account to the beneficiaries (their principals) for the profits they had made on the shares. This was so, even though the trustees had acted bona fide throughout, the trust lacked the legal power and the financial ability to buy these shares, and the purchase by the trustees led indirectly to significant profits for the trust (as well as for the defendant trustees).

Green & Clara Pty Ltd v Bestobell Industries Pty Ltd25 followed Boardman: It is enough, I think, to show that the fiduciary gains his knowledge or opportunity within the fiduciary relationship; . . . it is not necessary to go further so as to prove that either the information or the opportunity was in fact used so as to acquire that benefit. The reason for that, I think, rests in policy and it is based, inter alia, on the impossibility of proof.

23. [1966] 3 All ER 721 at 756: Lord Upjohn made this statement in his dissenting judgment. The real sensible possibility of conflict phrase was used by Burt C J in Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 at 5-6, but rephrased as a real and sensible possibility they may conflict

Green was manager of Bestobell Ltd. Just prior to leaving that company, he tendered through his own company (Clara Ltd) against his employer (Bestobell) for a major ceiling construction contract. By so tendering, he placed himself in a situation where his duty and his interest in fact conflicted.27 Green had to account, even though Bestobells tender ranked only third in priority. Canadian Aero Service Ltd v OMalley69 also upheld the traditional view. The plaintiff company pursued an aerial mapping project in Guyana. Two executive directors negotiated for some years, seeking the project for the company, before resigning from the plaintiff and forming their own

company, T Ltd. T Ltd tendered for and won the project in competition with the plaintiff. The plaintiff alleged that the executive directors had breached their fiduciary duty by depriving the plaintiff of the corporate opportunity which it had been developing.7 The Supreme Court of Canada unanimously agreed: ... a director or senior officer ... is precluded from obtaining for himself, either secretly or without the approval of the company.., any property or business advantage either belonging to the company or for which it has been negotiating; and especially is this so where the director or officer is a participant in the negotiations on behalf of the company.71

Competition between directors and the company A director can join the board of and work for a rival company, without breaching his fiduciary duties, if he does not pass on confidential information or use the companys property.34 Indeed, s 228(5) and (6) of the Code anticipate such rivalry when they call for the disclosure of competing offices.35 There may be advantages for the companies in sharing the talents of able directors. Over some issues, however, there will sometimes be tension between the interests of the competitors. In such situations, the directors position may be awkward and will require a clear appreciation of the fiduciary duties owing to each company.36 Where directors on competing companies boards consider any business matter of substance, there is a real sensible possibility of ~onflict37 of their duties to their company and to the other, competing company on whose board they sit. They are, admittedly, in a duty-versus-duty conflict and not a duty-versus-personal interest conflict, but the parallel is clear and the same rule applies.38 It matters not that the possible cause of any disloyalty by its directors is service to another competing company rather than service to self; the threat is the same. This matter has not yet become a major issue in the courts. In Abbey Glen Property Corporation v Stumborg,39 however, McDonald J doubted the authority of the dicta in London & Mashonaland, adding: Even where there is no question of a director using confidential information, there may well be cases in which a director breaches his fiduciary duty to company A merely by acting as a director of company B.

This will particularly be possible where the companies are in the same line of business and where acting as a director of company B will harm company A.40